Question

Consider a trader who buys a put option on Sterling pounds at a strike price of...

Consider a trader who buys a put option on Sterling pounds at a strike price of $ 1.4700, for a premium of $ 0.02. If exchange rates are 1.4378, 1.4458, 1.4500, 1.4682 and 1.4725. Calculate the gain or loss and state whether he will exercise the option or not.

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Answer #1

Strike price: $1.4700

Premium: $0.02

Trader will be in profit if the price is below 1.4700-0.0200= $1.4500

Rate 1.: 1.4378 : as the price is below $1.4500, he will exercise the option

Profit= 1.4500-1.4378 = $0.0122

Rate: 2.: 1.4458 as the price is below $1.4500, he will exercise the option

Profit: 1.4500-1.4458 = 0.0042

Rate 3.: 1.4500

Trader will not exercise the option as the price = Breakeven price i.e. 0 profit

Rate 4.: 1.4725 as the price is above 1.4500, trader will not exercise the option

Loss = option premium = $0.02

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